Pension Product Design and Relations to the Danish Market

This chapter discusses both the overall design of pension plans and the design of specific pension products found in the Danish occupational pension system. From the perspective of designing a pension plan, or indeed a national pension system, the sponsors and the funding structure are the two most important top-level design choices. In Denmark, the occupational pension system was structured as a nonsponsored, defined contribution system centered on pension funds and life insurance companies. After introductory remarks in Section 4.1, Section 4.2 describes these design choices and how they affect benefit characteristics. Section 4.3 investigates optimal consumption and investment decisions over a lifetime in a theoretical framework. The analysis shows that a mandatory, defined contribution pension plan featuring low-cost annuities leads to significant welfare gains for procrastinators who are incapable of accumulating sufficient retirement savings on their own. Section 4.4 turns attention to a comparison of the theoretically optimal investment profiles with those found in marketed life-cycle products, while Section 4.5 discusses insurance of disability and death risk, which is often an integrated part of pension savings contracts.